Ethicists see perils in fixation on stock

JOHN C. ROPER, Copyright 2006 Houston Chronicle |
February 21, 2006

Simply arriving at work was probably enough for most Enron employees to be reminded of what was of utmost importance to top executives there.

Stock tickers were in the lobby, most of the elevators and on top of the credenza behind CEO Jeff Skilling's desk where employees summoned to his office could see the value of Enron's stock "live" as it ebbed and flowed with the market.

"Almost everywhere you went in the Enron building you were exposed to the stock price," former Enron executive Ken Rice testified last week in the trial of his former bosses, Skilling and former Chairman Ken Lay.

Workers were even bombarded with a stock ticker as they entered the Enron building from the garage, said Rice, the former head of Enron's Internet unit and a key witness for the government who has pleaded guilty to securities fraud.

In many ways, the ongoing trial is about Enron stock and whether Skilling and Lay were behind a conspiracy to drive up its value.

Defense attorneys argue that the two men were hard-driving innovators doing what all corporate executives are supposed to do: make money for shareholders.

Regardless, experts believe that corporate executives who use a stock-price-at-any-cost mentality can create a culture that is ripe for breaches of ethics and even fraud — whether CEOs are orchestrating it or not.

"If you have a CEO who is motivated because of an option plan or a bonus plan to promote his stock, if he has the kind of personality that measures performance by the selling price of the stock, he's going to lead his board, his company and his shareholders down a very slippery slope," said Arthur Levitt, former head of the Securities and Exchange Commission and previously a chairman of the American Stock Exchange.

Levitt believes the stock-ticker mentality poses an especially big problem when compensation is tied to stock options — as it was for Enron's executives.

"If you compensate a CEO by giving him options, he's going to do everything he can to make those options as valuable as possible," Levitt said.

Earnings pressure

Prosecutors allege Enron executives in part hyped the company to pump up the stock price or used insider information so they could profit personally.

Rice, for example, acknowledged selling millions of dollars of shares after learning Skilling planned to resign, knowing that the stock price would drop when Wall Street heard the news.

Much of the testimony given by government witnesses so far has focused on the extreme pressures at Enron and its divisions to meet earnings targets to please Wall Street.

Mark Koenig, the former head of investor relations at the company, testified that earnings numbers were twice fudged by one and two pennies to match or beat Wall Street expectations.

Rice, once a protegé of Skilling's, told jurors that Enron Broadband Services lied to investors about the capabilities of the division out of the same fears.

Consequently, Enron saw a surge in stock price after each time it fudged its earnings.

"When people ask me what the leading cause was when they talk about what happened at companies like Enron or Tyco, I always tell them the focus on elevated stock price in the short term to me is the greatest contributor to this kind of behavior," said Jeff Salters of the International Business Ethics Institute, a nonprofit group based in Washington, D.C.

Salters said that can result in employees creating shortcuts or violating codes of conduct because such cultures reward employees for reaching stock-based goals but rarely evaluate the way they reach them.

Ethicists say there's nothing wrong with a business wanting to increase its stock price — it's what investors want, too — but it needs to be done with openness and integrity.

"To the extent that the stock price becomes the sole value guiding an organization, then everything else becomes a means to that end," said Margaret Cording, assistant professor of management at Rice University, whose specialty is business ethics.

Cording said the checks and balances are different for organizations that have a more long-term approach.

"All the implosions and crises that we had in this country in the last few years — Enron, Worldcom, Adelphia, Global Crossing — they were all corporate governance failures before they got to fraud," Anderson said.

His company is among those that work to evaluate the quality of a company's governance by understanding its culture. Doing so, he said, can reveal whether that culture is more likely to lead to fraud and in turn be a bad investment choice.

Key statistic gone

Late last year, the company decided to no longer publish quarterly earnings guidance, which analysts use to estimate a company's potential. Last month, Bill Ford, the company's chairman and CEO, told analysts Ford would no longer publish annual guidance, either.

"We must be guided by our long-term goals of building brand, satisfying customers, developing products and accelerating innovations," Ford said on Jan. 23, when announcing the decision.

Cording said those moves set the right tone to employees.

"That kind of leadership sends a powerful signal that meeting your earnings target is not the be-all and end-all for this firm and that there are limits," she said.